Minnesota’s community banks — a group that doesn’t include big players like US Bank and Wells Fargo — are improving their financial health and performance.

The Federal Reserve Bank of Minneapolis says profits for the some 370 banks rose slightly in 2011. Lending declined but not as much as it did the year before. And the banks reduced the amount of bad loans on their books.

Fed Senior Vice President Ron Feldman expects the banks will do better this year but fall short of historic norms for profitability, lending and loan quality.

This year “will have some areas of strong improvement,” he said. “Overall, continued improvement. But given weak conditions, even with strong improvement, you might find yourself not back to where you were before the crisis.”

Regulators are giving extra scrutiny to about a third of the community banks because they have lots of bad loans or other problems. In better economic times, only about 5 percent of the institutions typically draw such attention.

Only about a third of the banks increased lending last year. Feldman says he believes they want to lend but aren’t seeing strong demand from qualified borrowers. He said banks are battling each other on rates to make loans to financially strong borrowers.

“What we hear is there are some borrowers who are having a hard time getting any credit,” he said. “But if you’re considered qualified, competition on terms and conditions is very intense. If banks consider you to be a qualified borrower, you’re going to have a lot of people trying to get your business.”